While federal policymakers stall over how to regulate calls to Internet service providers, states are stepping ahead with their own policies on the controversial issue.

Yesterday, the Utah Public Service Commission told US West that it had to pay millions of dollars in back fees to a smaller competitor, Electric Lightwave, for local calls made to ISPs by US West customers.

Several days earlier, Arkansas regulators also ruled that calls to ISPs are local calls, and thus should fall under state regulatory control.

"We said they were local," said Sam Loudenslager, the state Public Service Commission's director of research and policy. "These calls to an ISP's modem are made using a seven-digit local number."

US West and the other big local telephone companies have argued at the state and federal level that consumers' calls to ISPs are long distance calls, since the traffic eventually winds up on the Internet. If this were the case, it would save the companies hundreds of millions of dollars, by allowing calls to ISPs to be exempt from costly "reciprocal compensation" contracts with their smaller competitors.

But an increasing number of states disagree with the companies. Arkansas was the 25th state to rule that ISP calls were local, thus falling under state control, despite expectations that the Federal Communications Commission will soon rule that they are long distance--and a federal concern.

When a local call isn't local
Under reciprocal compensation contracts, a telephone company must pay another company when calls need to be completed on that other company's network. Thus, if a US West customer calls an Electric Lightwave customer, US West is supposed to pay Electric Lightwave for completing that call.

Controversy over the issue began when alternative local companies began focusing on ISPs as customers. The large phone companies that had originally signed this type of contract had believed they would come out ahead, since they had far more local phone customers. But since calls to ISPs often last much longer than traditional calls, the big local companies found themselves owing millions of dollars to their smaller competitors.

While waiting for a definitive ruling from the FCC on the issue, some of the big local companies have refused to pay their competitors fees for calls to ISPs--with some of the bills mounting up to the tens of millions of dollars.

The Utah ruling in the Electric Lightwave case follows nearly two dozen other regulatory decisions that demand the big local companies follow though on their contracts.

"This was an open and shut case of the dominant phone company refusing to abide by its own contractual agreements and previous commission rulings,'' said Susan McAdams, vice president of external affairs for Electric Lightwave, in a statement.

But US West still believes the issue isn't that simple, and said it will appeal the ruling.

"It is our contention that traffic directed to ISPs is not local in nature," said Michael Frandsen, a US West spokesman. "These calls don't terminate within the state. They go elsewhere."

The company is confident that policymakers will close the reciprocal compensation "loophole," Frandsen added.

A decision from the FCC on the issue is expected any day. Commission members originally said they would rule by the middle of November, but sources in Washington say they have been stalled trying to balance competing interests of the state authorities, the dominant local companies, and the alternative local providers.